Embedding sustainability at the heart of operations Banks need to fundamentally embed sustainability at the heart of their strategic priorities. This should include the mobilisation of capital, a commitment to reaching net zero by 2050, a close engagement with clients and wider society in order to help the whole economy to transition and, finally, strong governance, which should be driven by a clear vision supported by the entire board of directors for best effect. To deliver these, the financial services sector needs better data from its clients to help them in their transition and manage risk. This is a reason why standards and reporting are so important. The impact of climate change also needs to be embedded into business frameworks. And there’s a challenge around training; banks need to ensure they have access to the skills needed to guide their sustainability objectives. There are a number of emerging technologies, such as quantum computing and artificial intelligence (AI), which are making a difference to what can be achieved through the monitoring and analysis of data to ensure sustainability targets are being met. The potential benefits are clear but to extract the maximum value it is important to invest in the right tools. IT infrastructure is only ever as good as its weakest link, so ensuring the most appropriate technology is used is essential. Taking a global perspective Fundamentally, we need to understand what people mean when they reference ESG if it’s to be quantified from a finance perspective. This is important as two thirds of global GDP is moderately or highly dependent upon nature.3 There’s a growing understanding of the financial risks from the physical impact of climate change, which is quite linear in terms of quantitative metrics and analytics, but there’s little understanding in terms of the multi-dimensional risks to nature, although it’s now starting to gain traction, which is opening up business opportunities for financial institutions. If you are investing in stocks and equities, there are already financial products out there such as sustainability or ‘green’ bonds. From a financial markets’ viewpoint, how do we expand the services that they provide so they get recognition beyond the compliance reporting elements? And how do we expand this to include nature? The good news is that there are a lot of great engagements, whether that’s through a conservation lens or a more ecological viewpoint, such as the blue economy, where there’s lots of FinTech startups trying to do the right thing. On the other hand, the interlinkage of the various financial instruments is still quite embryonic. Right now, amongst institutional investors, there is definitely an appetite and interest for more instruments of this type because it’s positive nature capital, but in terms of it being mainstream, we’re still a couple of years away from getting to the level of transactions that will be required. A green light for Europe Europe has set its sights on becoming a carbon neutral continent as described in the EU Green Deal. Examples of progress include the EU Taxonomy, which is underpinned by six objectives: the first two are related to climate adaptation and mitigation, the other four are focused on aspects of impacts on elements of social and natural infrastructure, including circularity and waste management. By analysing which of our economic activities are aligned to the EU Taxonomy, investors will be able to see very quickly which are more preferable in terms of their risk rating and also in relation to their investment opportunities. Those that are seen to be aligned to fossil fuels – and not aligned to the new taxonomy – can be avoided, helping to create a way of ensuring that funds are allocated to something that is beneficial, whether we’re talking about climate or nature. The traditional ways of doing valuations or looking at risk profiles are insufficient. Equally, corporations that are seeking capital funds to become greener and help them on their decarbonisation journey have a huge responsibility to improve the transparency of their reporting. If you’re the head of a fund, these are the indicators that you are already expected to report. A multi-faceted approach This transparency enables you to understand not just one dimension, such as your ecological footprint or when are you going to be carbon neutral, but the broader elements of the environmental, social and governance matrix. Everyone speaks about ESG but a lot of the time they’re really just focused on climate. This could be especially problematic for small to medium sized enterprises (SMEs) that often have a limited or low understanding Investment 72 Finance Monthly.
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